Global Economics

Tata Steel Bags Corus--But at What Price?

The Indian company won a bidding war with Brazilian rival CSN, but Tata's $12 billion acquisition will be tough to make work financially

Some deals are just deals. Others suggest a bit of history in the making. India's economic ascendancy received yet another confirmation with the news that Tata Steel bagged Anglo-Dutch steelmaker Corus Group (CGA) in a roughly $12 billion deal, which draws to a close a protracted bidding war with Brazilian rival Companhia Siderurgica Nacional (SID), or CSN.

"This is the first big step that the Indian industry has taken in the international marketplace and equipped itself as a global player," said Rata Tata, the patriarch and chairman of the Tata Group. "The underlying driver for the acquisition was that, if you are hungry for growth, you look at national and overseas boundaries."

In the rapidly consolidating steel industry, the deal is less than half the size of Mittal Steel's $23 billion acquisition of Luxembourg-based European steel giant Arcelor last year (see BusinessWeek.com, 5/26/06, "Arcelor: Steeling Thunder?").

The Tata-Corus deal is far less controversial, too, among European executives, some of whom frowned on the Mittal takeover of a big regional manufacturer.

Market Reacts Negatively

Even so, the deal will give Tata Steel roughly 19 million tons of extra capacity and vault it into the No. 5 position among big global steelmakers. "The Corus acquisition fits in with Tata Steel's strategy of achieving global reach in Europe and synergies with low-cost intermediaries in India," said Tata at a press conference in Mumbai on Jan. 31.

Corus is quite a prize for Tata—but was it really worth the price? Tata, after all, ended up raising its initial bid for Corus by half to fend off CSN. Even Tata's initial bid of $8 billion drew the attention of credit rating agencies such as Standard & Poor's, which placed Tata on its CreditWatch list with "negative implications" back in October.

Investors, meanwhile, dumped Tata Steel shares with unrelenting fury in trading on the Bombay Stock Exchange, where the benchmark stock index fell about 1%. Tata Steel shares were pounded down 11%. Tata execs were philosophical about the negative reaction to the Corus acquisition. "The market is taking a short-term and harsh view," said Tata. "Hopefully, somebody will look back and say that we did the right thing."

Tata Defends Deal

Tata Steel Managing Director B. Muthuraman was quick to point out the economic logic behind the deal. He said that the acquisition price values Corus steel-making capacity at about $710 per ton, which is far cheaper than starting from scratch. "Today, a greenfield (plant) with downstream products and construction solutions would work out to $1,200 to $1,300 per ton."

On Dec. 11, as the bidding war with CSN intensified with bids nearing $10 billion, S&P Singapore analysts Anshukant Taneja and Joey Chew warned: "The size of the acquisition and the potential cash outflow represented by Tata Steel's latest or future offers for Corus could have an adverse impact on its financial risk profile." (S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos. (MHP)) On Jan. 31, S&P said it would keep Tata Steel on CreditWatch with "negative" implications as it crunches the numbers on the deal.

Muthuraman says the deal will be financed with a mix of equity and debt, with a roughly $4.1 billion contribution coming from Tata Steel and group holding company Tata Sons. As for servicing the debt, he assured analysts and reporters that "Corus' own cash flows are more than adequate to service the funding requirements."

There will be some challenges when it comes to integration, Muthuraman concedes. "Today, Corus is less competitive," he says. "Tata Steel's margins are 30% and Corus' 10%." To close the gap, both sides will work to garner efficiency gains in manufacturing, logistics, and products.

India Ascendant

Tata Steel certainly has one thing going for it as it tries to play in the global steel industry big leagues—that is, the financial firepower of the entire Tata Group. It's one of India's biggest and most powerful diversified conglomerates with interests in everything from IT outsourcing to auto manufacturing and some $36 billion in assets (see BusinessWeek.com, 1/3/07, "Tata Far From Folding in Corus Bid").

Also, though it clearly overpaid for Corus, Tata Steel does have the advantage of operating in one of the potentially biggest steel markets. India is embarking on a huge drive to upgrade its transportation infrastructure, and the economy is expected to grow around 10% this year, on par with the world's fastest-growing economy and No. 1 steel consumer, China.

What's clear is that yet another Indian company has stepped out onto the global stage—and this is a source of deep pride in India, one of the most remarkable economic growth stories of this decade.